The West and the Rest

Maybe it's time to resurrect the idea of economic decoupling. For those who don't remember, that was the idea—much touted at the beginning of the financial crisis—that poor but up and coming nations like China, India, Brazil, and Russia (aka the BRICs) weren't going to follow the US and Europe into recession. After all, their economies were red hot, and they were growing their own new middle class of aspirational consumers eager to compete head on with Americans for compact cars, flat screen TVs and iPods.

Unfortunately, the idea lost its luster when emerging market stock indexes tanked 60 percent last year, and Cassandras like Morgan Stanley's Stephen Roach pointed out that consumer spending in China, the world's fourth largest economy, represents only a tiny fraction of the American consumer wallet. Translation: Don't count on poor nations to save the world.

That's still true, but perhaps only in the short term. Fund manager Antoine van Agtmael, the guy who happened to invent the term "emerging markets" about 30 years ago, says that even as the US and Europe flounder, the recovery has already begun in emerging markets, in part because they've got their act much more together than we do over here (plenty of other smart people, like Goldman Sachs' Jim O'Neill, agree with him – check out his guest essay this week). "China has a much bigger stimulus plan as a percentage of their economy than the U.S. does. Russia has plenty of reserves to deal with the over-leveraging of the oligarchs. India may have a budget deficit but it's far less dependent on exports, and Brazil is incomparably healthier than it was in the mid 1990s." Van Agtmael, who has gotten very rich predicting the future of these markets, notes that these economies will soon account for 1/3 of global GDP – double their share a decade ago. While the U.S. and European economies will shrink about 3 percent this year, China is still growing at 7 percent, and India around 5 – not bad for a global downturn.

What's more, he says, investors who put their money in the emerging markets actually did a lot better than they think, even accounting for the crash. When emerging markets hit bottom after their 60 percent drop, investors lost only three years of returns. After the U.S. markets tanked, they lost 10 years worth, and in other rich countries they lost five. Since last October, emerging markets as a whole are up 20 percent. These little engines that could just keep going…

...and for more about that, check out my longer piece on the matter, posted here.

The West and the Rest | News